Eastern & Oriental’s (E&O) 1Q FY20 was below expectations. Core net profit plunged 87% qoq and 60% yoy to RM9m in 1Q FY20. Unrealised forex loss of RM7m pushed net profit to RM2m (-88% yoy) in 1Q FY20. We cut our FY20-21E core EPS by 4-15% to reflect lower joint venture (JV) earnings from weaker new project contribution assuming slower sales and profit margins, given soft market conditions. We reiterate our BUY call with lower target price of RM1.14, based on a 60% discount to RNAV.

Weak Start in 1Q FY20

E&O’s net profit of RM1.7m in 1Q FY20 comprised only 2% of marketconsensus and our previous full-year forecasts of RM68.8-70.8m. Revenue fell 46% qoq and 33% yoy to RM135m due to lower revenue recognition for Seri Tanjung Pinang Phase 2A (STP2A) reclaimed land and STP1 projects, namely Tamarind and Ariza, which were completed in FY19. Hospitality revenue fell 30% qoq and 32% yoy due to the closure of the E&O Hotel Heritage Wing for refurbishment since March 2019.

Clearing Inventory and New Launches Set to Drive Sales

E&O remains focused on selling its inventory with book value of RM712m and there were no new property project launches in 1Q FY20. EBIT fell 71% qoq and 44% yoy to RM31m mainly due to lower revenue. EBIT margins narrowed to 27.1% in 1Q FY20, compared to 44.4% in 4Q FY19 and 27.4% in 1Q FY19. E&O achieved RM79m in pre-sales in 1Q FY20 with Penang properties contributing 94% of total sales. Unbilled sales were RM61m at end-1Q FY20. Planned new launches are The Conlay (GDV of RM945m) in August/September 2019 and The Peak (GDV of RM397m) in March/April 2020. We expect better 2H FY20 results, driven by the launch of new projects and sale of inventory.

Lowering Our Target Price

We revise down our RNAV/share to RM2.85 from RM2.96 to reflect a lower valuation for STP2A and Avira, partly offset by lower net debt levels. Based on the same 60% discount to RNAV, we lower our 12-month TP to RM1.14, from RM1.18. We reaffirm our BUY call. Key downside risk would be share overhang from its planned rights issue in 3Q19.

Lower JV Earnings

We reduce our core EPS by 4-15% in FY20-22E after assuming lower JV earnings from slower sales from the planned launch of The Conlay and a lower profit margin for Avira Garden Terraces. E&O incurred a net loss of RM1.6m at the JV level in 1Q FY20.

Improved Financial Position

Net gearing has improved to 0.24x at end-1Q FY20 from a peak of 0.99x at end-FY15 following the completion of its private placement of new shares, sale of inventory/land. Its improved financial position will likely support its plan to start to reclaim 100 acres out of a total 507 acres in STP2B and STP2C going forward.

Source: Affin Hwang Research - 28 Aug 2019